Iran's Economic Nightmare

The National Interest - December 22, 2014

Nader Habibi is the Henry J. Leir professor of the economics of the Middle East in the Crown Center at Brandeis University.

On November 24, the five permanent members of the UN Security Council and Germany (the P5+1) and Iran agreed to extend the negotiations regarding the latter’s nuclear program for another seven months. If the performances of Iran’s stock market and (informal) currency market since November 24 are any indications of public sentiment, they point to a general disappointment with the outcome of the nuclear talks. In the past few weeks Tehran’s stock market index (Tipex) has declined by more than 8 percent (and 20 percent in 2014) while the exchange rate of rial against the dollar has suffered a 10 percent decline.

Iran’s private sector was anticipating a nuclear agreement that would have gradually removed the devastating economic sanctions and put an end to current uncertainties. What they received instead was a continuation of the uncertainty surrounding the negotiations. Over the past two years, this uncertainty has sharply increased the risk of business investments in Iran for both domestic and international investors.

After suffering a sharp economic downturns in 2012 and the first half of 2013, the interim accord in November 2013 gave Iran some relief from sanctions in the form of a portion of its blocked oil revenues and allowing it to continue selling one million barrels of oil per day (bpd)– a significantly smaller amount than the average daily level of 2.3 million bpd that it exported before Western sanctions against its oil and financial sectors. This limited relief, in combination with better economic management by the new cabinet of President Hassan Rouhani and growing optimism about the negotiations, had a positive effect on economic conditions. The economic growth rate, which had been negative in 2013, rose to an annualized rate of 4.6 percent in the second quarter of 2014 (first quarter of Persian calendar). The inflation rate also declined significantly, from near 40 percent in 2013 to under 25 percent in 2014.... Read the Full Text